Pricing Hourly versus Value Pricing – How much do you want to track?

Pricing Hourly versus Value Pricing – How much do you want to track?

I’ve reached the point in my professional life when I’ve decided to price on the value of services delivered no matter the time required to deliver the service (end result). The rest of this post explains why time tracking is bad and value pricing is good. I’ll have future posts on the challenges and overcoming my historical pricing by hours.

Hourly pricing is bad. Tracking employee time by hours is bad, too, but that’s another discussion.

Here’s one reason why: no matter the service provided, the time required is just another item to track and is not indicative of the end result.

Example: if I tell a client I can move a pile of boxes from point A to point B in 10 hours for $100.00 total (or $10/hr), then my client will expect it to be done in 10 hours and to move the boxes.

If I finish early, the client may expect a discount. If I finish late, the client may fear an additional fee to compensate me for my time.

Counter example: I tell a client I’m going to move his boxes for $100.00. The client expects only that I move the boxes.

In the second example, I removed time from the business relationship and it only comes into play when we set on a start date and assuming I do not choose to finish at a later, unreasonable date.

So, the first reason is because we add an element to a business contract that has no value to the service provided.

The next reason is because time-based pricing does not account for value. Value is provided in many ways: doing something right the first time, providing long term value, educating others, etc…

Calculating value is tough sometimes. Buyers might not know how to quantify the dollar vale of a particular result. Organizations do not typically train people about how to dollarize issues. Without this info, sellers cannot help buyers figure out the value of the solution — not to mention the value of the seller’s specific additional value.

The exercise in dollarizing should be a part of every project before it begins. It’s the only way to figure out if a solution is more costly than the problem we’re trying to solve or the result we are trying to achieve.

We can all think of extreme examples: a Rolex watch. Does one really need to spend thousands on the ability to tell time? Wait! A Rolex does more than tell time. It’s a statement about one’s values and it communicates those values. To my father, it’s a waste of money, to one of my good friends, its worth more than the price he paid for it.

Finally, one should be paid what he/she is worth. I cannot really say what’s at the root of this issue better than the folks at VeraSage in their recent post. Self-esteem is an interesting factor. I agree with them wholeheartedly. Believe what you sell is worth what its really worth.

So combining the factors together: forget charging by the hour — charge for results. Set a base price for any service you perform no matter how small — so your value and experience is compensated. Base part of your fee on a portion of the dollarized value of the problem to solve or result to achieve.

I do love this post: time is a factor in the delivery pyramid, but truly it is *just* a factor. Using it as an assessment of value is taking the easy way out. MORE value can be obtained by focusing on quality and practices that enhance efficiency and pricing based on value to the customer. 🙂 Well written.